Pennsylvania Online Gaming: Why Online Gaming is ......7 Specific Considerations for State Policy:...

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0 Pennsylvania Online Gaming: Why Online Gaming is Important for Licensees and the Commonwealth June 10, 2015 Testimony of Michael Cohen, SVP and General Counsel Caesars Interactive Entertainment, Inc. Pennsylvania Senate Committee on Community, Economic and Recreational Development

Transcript of Pennsylvania Online Gaming: Why Online Gaming is ......7 Specific Considerations for State Policy:...

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Pennsylvania Online Gaming: Why Online Gaming is Important for Licensees and the Commonwealth

June 10, 2015

Testimony of Michael Cohen, SVP and General Counsel

Caesars Interactive Entertainment, Inc.

Pennsylvania Senate Committee on Community, Economic andRecreational Development

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Policy Environment

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Milestones in the recent history of U.S. online gambling – the reality

Today’s Reality – Millions of Americans in all 50 states gamble on the Internet, notwithstanding laws that prohibit/regulate such activity. Other than in the regulated jurisdictions of Nevada, Delaware and New Jersey,

online casino gambling occurs with no consumer protections - no protections against underage gambling; - no protections for problem gamblers;- ripe for fraud and criminal activity; and- no tax revenues for the Commonwealth

Growth of Internet gambling consistent with growth of eCommerce - period of growth beginning in the 1990s - Market was $300 million in 1997 Market grew to $4 - $6 billion by 2010 with some shrinkage post 2011 indictments

Illegal Operators - Market dominated by rogue offshore operators in defiance of U.S. and state laws

– See for example Lock Poker – Several articles in the last few months cited that Lock Poker, an unlicensed US facing online gaming site, has not paid out any player funds in over a year, with a reported $1 million in unpaid withdrawals for over 400 players

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Milestones in the recent history of U.S. online gambling - the law

Wire Act - Since 1960’s, the federal Wire Act had been applied to gambling that occurs across state lines via telephone and later the Internet. The Act had been broadly interpreted by DOJ to apply to and prohibit all forms of Internet gambling.

UIGEA - Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006UIGEA focus is on financial institutions -- establishes penalties for banks and financial

firms that process illegal Internet gambling payments UIGEA expressly creates an exception for (i) authorized intrastate gambling subject to

technology protections; (ii) bets and wagers under the Interstate Horseracing Act; and (iii) fantasy sports

Defines a bet as taking place where the bet or wager is initiated and received (removing argument of offshore operators)

DOJ Memo - In December 2011, the DOJ clarified its interpretation of the Wire Act: “Interstate transmissions of wire communications that do not relate to a ‘sporting event or

contest’ fall outside the reach of the Wire Act.”Consistent with Congress’ will in UIGEA, the DOJ ruling allows states to pursue intra-

state online gambling (non-sports).

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Where is the law today? The states jump into the action post-2011

State Activity - State legalization has followed UIGEA and the DOJ opinion with differing models:

Illinois and Georgia began selling lottery tickets online in 2012, and Michigan and Minnesota in 2014. Kentucky intends to launch in 2015. Nevada launched internet poker in April 2013, limited to NV casino licensees Delaware launched all forms of casino gambling in September 2013; limited to Delaware racinos on a common platform New Jersey followed shortly thereafter in November 2013 with all forms of casino gambling; limited to NJ casino licensees Many other states are examining or have examined gambling, including California, New York and Washington Nevada and Delaware entered into a multi-state Internet gaming agreement in February 2014. Pooled liquidity between Nevada and Delaware recently went live.KEY TAKEAWAY: The online gambling experience in the states has been successful from a regulatory perspective – minors can not gamble, the vulnerable are protected and consumer protections against fraud are in place

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Where is the law today? Most recent congressional activity

Efforts by a single casino operator to seek a prohibition – Bills filed in the House (Chaffetz) and a companion bill likely to be filed in the Senate by Senator Graham

–Restoration of America’s Wire Act (RAWA)–Hearing related to RAWA was held on March 25 in the House Judiciary Subcommittee on Crime, Terrorism, Homeland Security and Investigations

The threat of an online gambling ban from the Federal government is very real - The impacts of a federal ban if enacted:

–states will have no ability to enact legislation that would authorize any form of internet gambling–Federal government would be dictating to the states policy on what has historically been a 10th amendment state police powers issue (gambling within its borders) –the illegal environment operated by offshore parties targeting Americans will stay in place with no consumer protections and no tax revenue for states

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Overarching Policy Issues

Internet gaming is here to stay - simple prohibition has not and does not work

Whether the solution is state or federal, states should maintain their ability to define gambling policy within their borders consistent with UIGEA and the 10th amendment - States should be able to determine whether to prohibit online gaming or regulate it – a basic function of state police powers.

We strongly advocate state and federal laws working in tandem in a manner that:

(i) respects the right of states to either prohibit or authorize Internet gaming;(ii) establishes strong consumer protection standards and strict regulatory

controls; and(iii) provides effective law enforcement tools to drive bad actors out of the

marketplace

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Specific Considerations for State Policy:– Allow licensed gaming operators in a state to offer Internet gaming

Avoid the fate of other industries that have ignored the Internet (record industry, book stores)

Based on experiences to date in regulated U.S. jurisdictions, online gaming is likely to increase – not cannibalize – overall revenues and taxes

Online gaming will create cross marketing opportunities for licensees and improve distribution channels for operators to all customer segments

– Establish a strict regulatory framework and strong consumer protections to: Prevent minors from playing, with robust age and ID checks Ensure players within borders with strong geo-location technology Impose tools to deal with problem gambling (e.g., responsible gaming policies, allow self-

imposed limits on deposits, losses, and time) Ensure that games are fair and honest -- strict regulatory scrutiny and testing

– Empower law enforcement officials with stronger tools to shut down the illegal sites (white lists, unambiguous crimes, seizure rights over domain names)

– Offer the state a new source of revenue and capture state revenues that currently are evaded

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Regulatory Overview

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Registration Process

Responsible Gaming validation

Unwanted List scrub and validation

IP Geo Location

Geolocation Biometric fingerprinting

Internal neural network rules validation

AGE & IDSSN validation New

Technology

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Registration ProcessThis is a core requirement prior to any real money gaming taking placeShould any of these checks fail the account will be placed into suspension

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Registration Process

Responsible Gaming

Sanctions check

Geo Location

Geo-location is defined as the identification of the real-world geographic location of a party

• Used to determine State and Country• Connection Type (eg: broadband or dial up connection)• whether a proxy server or anonymizer is being used and more

Both Cellular triangulation and WIFI triangulation are the core mechanisms for location control and player location

PEP: Worldwide Politically Exposed Persons DPL: Denied Persons List –US Dept. of Commerce. OFAC watch list – Office of Foreign Assets Control, US Department of Treasury Mortality check and more

Age & ID

Validation against “Self excluded list”• Proprietary Operator List• Operator brick and mortar self excluded list

By using leading third party providers we are able to determine the age and ID of a player in real time

Player matching is done on SSN, full name, address, zip code and DOB to validate age and residency

Anti spoofing technology

We leverage state-of-the-art anti spoofing technology to assure the player cannot mask their location by using or leveraging 3rd party software

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Fraud & Collusion

Fraud and Collusion rule sets function very similarly to payment processing authentification. They are independent rule sets that are triggered based on game play and player actions on the system. These rules out-sort and flag players:

• Who regularly play at the same tables• Who frequently lose to the same members• Who is potentially using unfair software to gain an advantage over other players• Who has been playing for an amount of time that is deemed suspicious or

“robotic”• Whose mouse clicks are in the same or nearly the same pixel area on the screen

i.e. clicking an action button in the same area consistentlyReviewing game-play of members whose play is reported by others as being

suspiciousChip dumping

• Players are flagged depending on the amounts they have deposited in relation to their current balance and level of games played

• Players who lose large amounts of money over a short period of time are identified as this represents the typical pattern of behavior for intentional chip-dumpers

Poker collusion • An automated process that runs on the poker platform, highlighting players who

have certain predetermined ratios with regards to hands played, raise ratios and rounds they play with the same players

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Anti Money Laundering

Every transaction is recorded which allows the flow of money to be easily tracked

In order to prevent money laundering there are a number of reports and checks which are designed to identify possible money laundering activity

• Reviewing unusual deposit patterns• Reviewing unusual cash-out patterns• Identifying poker members who frequently play with the same members• Identifying poker members who frequently lose to the same members

Should there be any evidence to support a suspicion of money laundering, the account is immediately suspended pending a full investigation

Operators leverage the Know Your Customer (KYC) protocols that all banks must comply with in order to issue credit or debit cards and bank accounts to their customers

Any suspicious findings will be submitted to the authorities through the STR (suspicious transaction reporting)

All deposits have wagering restrictions (for example, minimum number of hand requirements) so depositing a large sum and trying to cash-out without meeting these restrictions will automatically suspend the cash-out and place the account under review.

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Responsible Gaming

As is the case with bricks and mortar gambling, as an online gambling provider, we only want customers that are gambling for entertainment purposes to play, not those with gambling problems

Online gambling technology provides players with the ability to manage their game play in real-time:

• Setting daily, weekly, monthly deposit limits• Setting session limits to advise when a time threshold has been hit • Setting a cool-off period• Allowing players to self-exclude from the site for a defined period of time

or forever • Fully auditable transaction history (deposits and withdrawals and hand

history)

Operators would leverage the expertise of the problem gambling services community and guide people who may feel they need expert assistance

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Online Gaming’s Importance for Licensees and the Commonwealth

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Online Gaming will likely increase – not cannibalize –overall revenues and profits

• Poker market in land-based casinos has grown since the onset of online poker

• Offline poker revenues have grown since the inception of online poker

• CIE’s NJ experience has shown that online gaming is attracting a younger player; over 60% of players online are between 21-39. For offline casinos, that same age group is less than 30% of the players. These are new players that may also be attracted to the offline casinos.

• Retailers that have embraced online channels have grown both online and offline

• Multi-channel shoppers are more valuable than single-channel shoppers

• Those retailers that have rejected the internet have faded (recording industry, newspapers etc.)

Retail experience shows that online

drives sales overall

Online poker has catalyzed growth

in US offline markets

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Online Gaming is Another Element of the Offline Casino Offering, Not a Highly Profitable Standalone Business

iGaming Operator Cost Structure 14%Gross Win Tax2

1) Source: Morgan Stanley Research, March, 20142) Source: H2GC iGaming Report, April, 2015

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The New Jersey online gaming market was roughly one-half of what analysts initially projected at the beginning of 2014

‒ However, during the first 19 months of online gaming operations in New Jersey, over 70% of CIE players were not players at CZR’s brick and mortar casinos, showing that the online player is a new player. Furthermore, 15% of CIE’s online players, who are also CZR brick and mortar customers, were inactive casino players that re-activated (by visiting a casino) after signing up online, showing that the casinos saw increased visitation by reactivating inactive players through online channels

New Jersey Case Study

Illustrative Operator Profitability

The cost structure shown to the right is an example of a typical operator of an online gaming business

Given the ongoing costs associated with the business, including marketing, technology, gaming taxes, and license fees, a typical operator can expect only a 7% profit margin

Online Gaming Tax rate must match the business realities

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What’s all this mean for Pennsylvania?

Both the Commonwealth and its casino operators will benefit from regulated online gaming

• Most of the casino industry has converged to advocate for online gaming in order to grow Pennsylvania brick-and-mortar casino businesses

• Independent analysis confirms the revenue potential for the Commonwealth – According to the May 2014 report by Econsult conducted for the Pennsylvania Legislative Budget and Finance Committee, the annual, ongoing revenue potential for online gambling in Pennsylvania is $307 million, which would mean tax collections of approximately $43 million applying a 14% tax

The market potential translates to an important new revenue stream for Pennsylvania• Potential for upfront licensing fees• Taxes both on operator revenues as well as capture of income taxes• But online gaming tax rates must be aligned with business realities• As Econsult indicated, the illegal market limits the ability to extract high tax rates, and an

overly burdensome tax would reduce the positive spillover effect on existing casinos• The global online gaming experience demonstrates that tax rates higher than 15% have

stifled growth and adversely affected business sustainability

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What’s all this mean for Pennsylvania?

New research by H2 Gambling Capital confirms the Econsult findings

•The Pennsylvania online gaming market is expected to gross between $2.56 billion - or an average of $256 million / year (base case), and $3.58 billion - or an average of $358 million / year (best case) over 10 years.

•At a reasonable 12% tax rate, the amount generated for the Commonwealth could be in the region of $31 million (base case) to $43 million (best case) per year.

•An upfront license fee in the range of $5m is reasonable, and with 12 existing licensees applying equates to $60m in additional state revenue.

•Notably, if offline registration is required for online play, H2 Gambling Capital estimates that gross win will fall by 50% or more.

•Based on evidence both from the United States, and around the world, regulated online gaming in Pennsylvania is unlikely to cannibalize Pennsylvania’s existing land-based casino market, and will help significantly to eradicate the existing illegal market.

•A regulated online gaming market in Pennsylvania will also deliver player protection, security.

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Conclusions

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Conclusions:Pennsylvania citizens illegally engage in Internet gaming today with no

consumer protections and no regulatory oversight

The time to act on this is now, as other jurisdictions are moving forward and the threat of a Federal ban on state activity is imminent

The technological and operational controls for online gaming are state of the art and have a proven track record

Legalization is important to Licensed Operators in the Commonwealth to stay relevant with the “Internet generation” and to help create new marketing tools/channel of distribution

The evidence from the U.S. and elsewhere supports the proposition that internet gambling will not cannibalize existing revenues

There is significant revenue potential for the Commonwealth